Microsoft calls this new trend ransomware, and it looks a lot like older scams in which an app masqueraded as an antivirus program and then tried to sucker you into buying a useless piece of software to remove an infection that doesn't exist.
In the case of ransomware, an infection takes control of and holds hostage an infected machine, locking the user out until a payment of some form is made. In one case, Microsoft found an example that looked like an official Microsoft screen, claiming the Windows license was invalid.
The ransomware locks the computer, displays the alert screen and demands the payment of a "fine" for the supposed infraction through a legitimate online payment service like Paysafecard or Ukash. Since many of these infections are taking place in Europe, Paypal does not seem to be involved.